Democrats Target Prepaid Debit-Card Fees

Fresh off a victory in their efforts to crack down on the debit card "swipe" fees that banks charge retailers, Democrats are now setting their sights on the prepaid card market.

On Friday, a group of Senate Democrats introduced legislation that would limit the type of fees that could be charged on prepaid cards.

Overdraft, balance inquiry and customer service fees would all be banned under the bill, which would also require more disclosure about fees being charged.

The legislation, which is still in early stages and faces an uncertain future, would take a huge bite out of the growing prepaid card market that companies like Bank of America Corp. and MasterCard Inc. are increasingly exploring.

Mercator Advisory Group has forecast that funds loaded on prepaid cards will grow to $118.5 billion in 2012 from $36.6 billion in 2010. MasterCard recently forecasted that prepaid volumes would reach more than $840 billion by 2017.

The legislation would be yet another blow to an industry that has faced a barrage of legislative and regulatory reforms, sending credit card companies in search of new profits.

On Thursday, the Federal Reserve proposed deep cuts in the debit card "interchange" fees that U.S. banks charge retailers. The proposal would also expose card networks Visa Inc and MasterCard to more competition, news of which sent shares of those companies reeling.

The prepaid industry targeted in the legislation released Friday covers a wide range of cards — from gift cards that can only be used at specific retailers or until a set amount is spent, to "general-purpose" cards that can be used like traditional debit or credit cards, as long as consumers keep reloading the funds.

General purpose cards can replace bank accounts by accepting direct deposits directly onto the cards, and are generally marketed to younger, poor consumers, who rely heavily on cash and do not have much access to credit.

A recent effort by the celebrity Kardashian sisters to introduce a prepaid "Kardashian Kard" — with fees that could reach at least $100 a year — brought some negative public attention and notoriety to the prepaid industry and the fees some providers charge.

"We need to ensure that families who rely on prepaid cards are not surprised by hidden fees and are not hit with fees that are totally unnecessary," Democratic Senator Robert Menendez of New Jersey, who introduced the bill, said in a release.

The bill basically has no chance to be enacted this year, but it sets a marker for the next Congress and illustrates that Democrats will continue their push for more regulation of the fees charged when consumers use a variety of cards.

Banks have been slow to get into the general-purpose prepaid space, although Bank of America and others are exploring ways to introduce more of them. For the moment, the dominant prepaid providers are marketers Green Dot Corp. and Netted Holdings Inc., which both went public this year.

Visa and MasterCard are also looking to expand their prepaid processing businesses. Last week, MasterCard agreed to spend $459 million on a prepaid business of foreign exchange group Travelex.

Following the Fed's proposal, industry members said more banks would be likely to steer their customers toward more lucrative products, including prepaid debit.

"You've now set interchange low enough that merchants now have every incentive in the world to steer people toward debit, but banks have every incentive in the world to steer people towards another product, like credit or prepaid debit," said Evan Staples, equity analyst with First American Funds, which owns shares of U.S. banks and Visa and MasterCard.